Younger aircraft and engine parts add up to be worth more than their wholes
The retirement age of commercial aircraft is decreasing as the global fleet renews, which is causing teardowns at younger ages. Factors contributing to early retirement include higher fuel prices that make older aircraft more expensive to operate, financing that is easier to obtain for new aircraft than used and regulations impacting aging aircraft.
Of the 19,000 commercial aircraft in service, only 5,400 will remain in the global fleet by 2029, predicts Larry Schneider,vice president for product development, who says the average aircraft is about 25 years old at retirement.
TeamSAI concurs, forecasting that 30% of the 2012 fleet of in-service and stored commercial jets and turboprops will be retired within 10 years. In the last decade, the average age of the passenger jet fleet dropped two years, says David Marcontell, TeamSAI M&E Solutions president. If this trend continues, the average retirement age will drop one year for every five-year period, he says.
Aircraft due for heavy maintenance often are the first candidates for retirement or parking. Marcontell points out that aircraft “last off the [production] line,” especially those succeeded by newer models, are also targets due to their shorter useful economic life. As of March, 1,959 single-aisle aircraft were parked, compared to only 433 twin-aisles. The number of parked twin-aisles has remained relatively steady since 2005, but the number of single-aisles rose to a peak of 2,145 in early 2011 from 1,288 in late 2007, says Fred Klein, president of Aviation Specialists Group..
Not all aircraft reach the desert or dismantling facilities. “Niche aircraft such as theand 767 are difficult to replace,” says Marcontell. Not having a replacement alternative, coupled with “a purchase or lease price low enough to offset fuel and maintenance costs, can make aircraft still viable on a cost-per-seat-mile basis,” he says. However, falling valuations make financing more difficult for aircraft older than 5-6 years, says Klein.
Will airlines be able to sustain the current level of fleet renewal, given higher aircraft prices or lease rates? Marcontell does not think so, but he believes the trend “is probably solid for the next 5-8 years.”
The fact the government export banks “enable Tier-3 buyers to finance aircraft at Tier-1 rates instead of buying used models” contributes to this trend, says Bernard Comensoli, CEO of Research & Business Development S.A. in Switzerland.
In addition, more than 40 countries have restrictions on the age of imported aircraft, says Marcontell. These tend to be countries with emerging economies. Europe, Canada, Australia and the U.S., where more stringent maintenance regulations and regulatory oversight exist, do not impose aircraft age restrictions, he notes.
If the average retirement age is about 25 years, why are aircraft as young as six years being parted out? Simply put: their pieces are worth more than the whole. “Used parts maintain their value longer than aircraft—their prices fall much slower than prices for the whole aircraft,” says Comensoli.
Mark Gregory, managing director of Air Salvage International in the U.K., has dismantled three nine-year-old-700s this year and has two more scheduled. A 737NG generates 1,800 parts for sale, opposed to only 400 for the 737 Classics, Gregory says. Used parts prices for the Classic models are depreciating because of oversupply. “Once you take the engines off of a 737-300 or -500, you're lucky to get $200,000 for the rest of the aircraft,” he says.
Earlyface the same situation. Gregory says they generate about 700 parts, compared to 1,200 parts for newer models. It comes down to supply and demand: leading parts companies and airlines are requesting used parts for younger aircraft, which prompts aircraft to be dismantled at earlier ages. However, most of the 45 aircraft Air Salvage dismantles annually are 15-20 years old.
Air Salvage, which works with many lessors, stores most aircraft for 90-120 days and some up to 180 days, says Gregory. If the aircraft cannot be re-leased, the engines are usually sold, then the rest of the aircraft is dismantled and a parts company sells the pieces, or the dismantler consigns the parts to a company such as Universal Asset Management (UAM).
Jeff Lewis, UAM's vice president for business development, pinpoints three parting out candidates:
•-200/-300/ER: With 860 -300s in service and another 76 parked, Lewis says “operators continue to seek short-term leasing opportunities.” This prompts demand for aircraft components and heavyweight landing gear, auxiliary power units (APU) and thrust reversers. There is high demand for Pratt & Whitney 4000 and engine material, and he says the engines also are strong lease candidates. He sees limited demand for JT9D and RB211 material. Given the parts commonality between the 767-200/-300 and 757, Lewis says the -200 is a better recycling candidate. Once the and Airbus fleets grow, expect the 767s to be phased out.
•-400: With 600 in service and 63 in storage, Lewis expects 30 of these to be parted out in the next 36 months. UAM tore down 12 in the last 18 months and just took two more from , he says. Several airlines are phasing out this type and Lewis says the freighter market is saturated, so these aircraft are not being sought for cargo conversions. “At $22 million for a conversion, plus a D check, that's almost $30 million, which makes it hard to deploy as a straight freighter,” says Lewis. He sees strong demand for heavyweight landing gear, APUs and thrust reversers, partly because “it is becoming cheaper to buy these components than overhaul them.” While there is not much need for RB211 engines, Lewis points to “a strong demand for RB2211 thrust reversers and nose cowls.” In the next 12-24 months, he cautions that the 747-400 component market could become saturated.
•Airbus: Only two have ever been parted out, but as airframes near 15-16 years of age, they could become disassembly candidates. With 848 in service and 31 in storage, “there is a strong demand for this aircraft for lease,” Lewis says, especially from medium/long-haul low-cost carriers like Air Transat in Canada. “Redeploying a 10-year aircraft is easy to do, but 15-year-old ones are more difficult,” he notes. Some A330s also could be converted to freighters. Given the 70% parts commonality between the A330s and , demand for components exists. For this aircraft, Lewis sees a “good demand for and Trent thrust reversers and nose cowls.”
Comensoli adds the Airbus A320 family as candidates—4,838 are in service and 147 are stored. He estimates 70-90% of the aircraft value is based on remarketing theand engines. Recycling 1989-91-vintage A320 “rotables, interior equipment, some flight controls and metal recycling earns $1-1.2 million,” says Comensoli.
He sees prices falling rapidly for the 2,250 aircraft near the 15-year vintage, such as the A320/A321, A330/A340 and Boeing 767. While values for 5-15-year-old aircraft are dipping, these fleets face maintenance requirements and rely on the secondary market for parts, which is driving more disassembly. As values fall, “part-outs become economically viable at younger ages,” says Comensoli. This makes several in-production aircraft models available for “prices approaching salvage value,” he adds.
GA Telesis, which leases and provides aftermarket support for aircraft and engines, has disassembled 150 commercial aircraft and 500 jet engines in the past eight years. Vice President Phil Arroyo says, “there is approximately $500 million in the teardown pipeline.” He sees the strongest demand for aircraft 12 years of age or older.